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From late 2008, the government responded to the international crisis through a combination of countercyclical fiscal decisions and efforts to support companies and retrenched workers in collaboration with social partners. The evidence available to date suggests that the macroeconomic measures were effective in ameliorating the impact of the crisis. In contrast, the microeconomic measures were implemented only after long delays and on far too small a scale to address the unemployment crisis directly. Moreover, the government did not deal effectively with the rapid appreciation of the rand from early 2009, which seemed likely to slow the economic recovery significantly.

The commitment to a countercyclical fiscal policy emerged from the decision to maintain growth in expenditure despite the slowdown in revenues. In the 2009 fiscal year, revenues dropped by 9 per cent but nonetheless, the Treasury maintained expenditure growth at 9 per cent (Treasury 2010) and as a result, the budget deficit reached almost 8 per cent of the GDP.

The adoption of a countercyclical strategy contrasted with the experience in the last severe downturn. In the late 1990s, the Treasury had cut expenditure, which probably aggravated the slowdown as well as causing significant difficulties for the major public services.

Table 12: Change in national expenditure and revenues in real terms (a), 1998 to 2009

Note: (a) Expenditure and revenues are deflated using CPI. Since the CPI series has changed twice over the period, the figures should be treated as estimates. Source: Data for expenditure and revenue for 1999 to 2008 from Treasury, Budget Reviews, relevant years, Table 1. Data for CPI downloaded from www.statssa.gov.za in 2005 and January 2010. Data on anticipated revenue drop in 2009 from Treasury, Statement of the National Revenue, Expenditure and Borrowing as at 28 February 2010, Issued by the Director General: National Treasury. Tables on revenue and expenditure. Downloaded from www.treasury.gov.za in April 2010.

The Treasury called South Africa’s fiscal response to the crisis ‘among the biggest in the world’ (Treasury 2009a, p. 6) but the rapid expansion in spending could not be sustained unless the economy, and revenues, picked up fairly soon. Even so, in order to shrink the budget deficit to 4 per cent of the GDP by 2012, the Treasury planned to increase expenditure by only 1 per cent a year in real terms for the next three years. That contrasted with an average growth in spending of 9 per cent a year in 2006 to 2009 (Treasury 2009a, p. 38).

The risk, in South Africa as around the world, was that the lack of fiscal space after 2010 could limit government’s ability to accelerate the recovery or address any renewed downturn. Internationally, this situation may cause a double-dip recession, with a further decline in the global economy as stimulus packages wind down in the course of 2010.

The fiscal response to the crisis centred on carrying out infrastructure investment plans initiated in the mid-2000s. South Africa benefited from the fact that these programmes were planned before the recession started. Expenditure from 2009 to 2011 was expected to split almost evenly between general government and state-owned enterprise, mostly Eskom and Transnet. Altogether, public investment was expected to total almost R270 billion in 2010, and around R300 billion in each of the next two years (Treasury 2009a, p. 44).

As the following table shows, in the year to the third quarter of 2009, a sharp jump in public investment contrasted with a steep decline in private investment. As a result, total gross fixed capital formation climbed 2 per cent in the nine months to mid-2009, although it then fell 1 per cent in the third quarter of 2009. It peaked at 23.7 per cent of GDP in the first quarter of 2009, before the drop in private investment pushed it back down to 22.5 per cent in the third quarter of that year (SARB 2010, p. S-150).

Table 13: Gross fixed capital formation by type of organisation, 1999 to 2009, in constant 2005 prices, annualised and seasonally adjusted

Source: Data on gross fixed capital formation by type of organisation in South African Reserve Bank. Zipped data files on national accounts for the Quarterly Bulletin No 254, December 2009. Downloaded from www.reservebank.co.za in January 2010.

The impact of the expansionary fiscal policy was reflected in GDP and employment trends by sector. Value added in general government and construction combined climbed by almost 5 per cent in 2009, while the rest of the economy shrank by 3 per cent.

Table 14: Change in value added by sector, 2009

Source: Calculated from data on seasonally adjusted value added by industry in constant (2005) prices in Statistics South Africa. GDP data to fourth quarter 2009. Excel spreadsheet downloaded from www.statssa.gov.za in April 2010.

The employment data also pointed to the impact of the stimulus package, although less unambiguously. As the following chart shows, employment in utilities and social services, which were largely in government hands, declined relatively little between the fourth quarter of 2008 and the third quarter of 2009, and then expanded. Construction saw a steep fall for most of 2009, largely because investment in housing plummeted by 11 per cent (SARB 2010, p. S-120). But the sector grew relatively rapidly in the last quarter of 2009.

In contrast to the large scale fiscal response, the government’s efforts to support companies and individuals affected by the downturn seemed largely ineffective. The government agreed these measures with organised business, labour and community representatives under the auspices of the National Economic, Development and Labour Council (NEDLAC) in February 2009 (NEDLAC 2009). They included:

 Introduction of a ‘training layoff’, using sector training funds to support retrenched workers while they obtained a qualification;

 Provision of funds through the Industrial Development Corporation (IDC) to companies facing hardship because of the economic downturn;

 Strategies targeted at stressed sectors;

 Tightening up on illegal imports of consumer goods;

 Encouraging local procurement by government departments and companies; and

 Growth in the national public employment scheme, the Expanded Public Works Programme (EPWP).

Government estimates indicated that these programmes, taken together, created or saved a total of around 100 000 full-time employment opportunities (Zuma 2009) – that is, about 10 per cent of all the opportunities lost by the third quarter of 2009.

Table 15: Change in employment by sector, third quarter 2008 to third quarter 2009

Source: Calculated from data on employment by main industry in Statistics South Africa. Quarterly Labour Force Survey. Third quarters 2008 and 2009. Databases downloaded from www.statssa.gov.za in December 2009.

The IDC set aside R6 billion for the three years from 2009 to 2011, which was supplemented by R2 billion from the Unemployment Insurance Fund. By November 2009 it had extended around R1.5 billion in loans to thirty companies, largely in mining (Nkwinti 2009). In December, the government reported that the IDC had thirty-three applications in the pipeline, for a total of R2 billion, and that it had saved an estimated 7 700 jobs (Zuma 2009). By this estimate, each job saved had cost the IDC around R130 000.

Ensuring local procurement of inputs by the state could potentially compensate companies for the decline in private demand, but in the event, efforts to implement the government commitment in this area proved halting. Attempts to encourage local procurement of inputs for the infrastructure investment programme were burdened by short lead times on many tenders as well as the strong rand – factors that made it hard for local producers to gear up to compete. Only in December 2009 did the government officially propose that departments set aside points in the tender process for local procurement (Zuma 2009). Even then, as of early 2010 no formal communication had been sent to departments by the Treasury.

Table 16: Estimated employment impact of microeconomic measures in response to the international economic crisis

Notes: (a) The EPWP created some 224 000 short-term employment opportunities. The estimate given here reflects past estimates by the programme of the ratio between full-time employment equivalents (FTE) and employment opportunities in the programme. Source: For employment data, President JG Zuma, ‘Media statement by President JG Zuma following the report back by the leadership group of the framework response to the economic crisis, Presidential Guesthouse, Pretoria, 3 December 2009’. Downloaded from www.gov.za in January 2010; the ratio between FTE and employment opportunities estimated from Department of Public Works, ‘EPWP Report for the Period from April 2008 to March 2009’, Annexure A, downloaded from www.epwp.gov.za in January 2010.

The government also created low level employment opportunities directly through the EPWP. In the first half of 2009, it created 225 000 employment opportunities, the equivalent of about 78 000 full-time jobs. That meant it provided around four out of five of all full-time equivalent positions created under the micro-economic measures in the national response to the crisis. The EPWP was expected to grow to 610 000 full-time equivalents by 2013/4 (EPWP 2010). That target equalled around 10 per cent of all unemployed plus discouraged work-seekers in the third quarter of 2009.

The government response was notable for its failure to address a looming problem: the appreciation of the rand. In the NEDLAC document, the state agreed with the main economic stakeholders on the importance of a competitive currency (NEDLAC 2009, p. 8). Yet in late 2009, the rand was stronger against a trade-weighted basket of currencies than at any time since 2006, although it did not reach the historically strong levels of 2004 and 2005 (SARB 2010, p. S-103). The value of the currency had recovered by about 20 per cent from the beginning of 2009. That, in turn, made it harder for South African producers to compete with imports and on international markets.

Table 17: Trade-weighted value of the rand, monthly average, 2004 to 2009

Source: For data through October 2009, series on trade-weighted value of the rand from South African Reserve Bank. Zipped data files for the Quarterly Bulletin No 254 – December 2009. Downloaded from www.reservebank.co.za in January 2010. For data from October 2009, South African Reserve Bank. Quarterly Bulletin, March 2010. Page S-78. Downloaded from www.reservebank.co.za in April 2010.

The rise in the rand was mimicked in other emerging markets. It apparently reflected the efforts of the central banks of the global North to stimulate their economies by pumping funds into their economies and restraining interest rates. Institutional investors from the industrialised economies responded by looking to short-term equity and bond holdings in middle-income countries. In the case of South Africa, after an outflow of R5 billion in the third quarter of 2008, inflows climbed to R41 billion in the third quarter of 2009. In nominal terms, that was higher than all except two quarters in the previous twenty years. Inflows fell back to R23 billion in the following quarter – still substantial compared to previous years.

In response to the appreciation in the rand, in late October 2009 the Treasury relaxed some exchange controls. The argument was that this would foster an outflow of capital to offset inflows from the rest of the world (Treasury 2009a, p. 9). As of January 2010, this strategy had not visibly affected the value of the rand, although the trade-weighted data were not yet available. More important, even if it succeeded, South Africa would have traded national resources for short-term, unreliable foreign inflows into stocks and bonds. That outcome seemed likely to make it more difficult in future to mobilise national savings to support developmental investments.

In contrast to the South African strategy, Brazil imposed a 2 per cent tax on investment in equity and bonds, explicitly to deter short-term inflows that were propping up its currency (Silverblatt 2009). In effect, the Brazilian government found that sustained economic growth required a stable and weaker currency more than increased imports fuelled by short-term portfolio investments from abroad.

Table 18: Quarterly capital flows (balance on financial account), first quarter 1990 to third quarter 2009.

Source: For data through the third quarter of 2009, series on quarterly change in financial account from South African Reserve Bank. Zipped data files on balance of payments for the Quarterly Bulletin No 254 – December 2009. Downloaded from www.reservebank.co.za in January 2010. For the final quarter of 2009, South African Reserve Bank. Quarterly Bulletin, March 2010. Page S-103. Downloaded from www.reservebank.co.za in April 2010.